Lagarde Pushes Back Against a Springtime Cut

In focus today

Today focus in the euro area will be on minutes from the December ECB meeting.

As for data releases Thursday looks rather light, however in the US the Philly Fed Manufacturing Index comes out. Consensus expects an improvement.

A few central bankers are scheduled to speak today with SNB chairman Jordan speaking at 11:30 CET, Fed’s Bostic speaking both at 13:30 CET and 17:30 CET. Riksbank Governor Thedeén is also speaking, as he gives his view on the new Riksbank law in a speech at 16:30 CET. The speech is published on the Riksbank web page. Finally, ECB President Lagarde speaks again today at 16:30 CET, but as the ECB has entered the ‘quiet period’ today, markets should not hold out for any clues for the Monetary Policy Meeting next week (25 January).

Overnight we get nationwide December inflation data out of Japan. Tokyo December inflation declined and indicated price pressures were quite muted for the second month in a row. Spring wage negotiations remain key to the Japanese inflation outlook.

Economic and market news

What happened overnight

Market narrative of early springtime rate cuts got challenged yesterday by both strong data points and comments from central bankers (more on both below). As of this morning Asian markets are a mixed bag.

In the commodity space oil prices are up reversing some of the slide from yesterday with Brent spot trading at USD78.10/barrel at 06:00 CET this morning.

What happened yesterday

ECB President Lagarde said it is likely the ECB could begin to cut interest rates in the summer. She emphasised however the importance of data coming in late spring, thus reiterating the views of Chief Economist Philip Lane who spoke of the need for Q1 wage data that would not be available until end of April, thus only come in time for the Governing Council meeting in June. GC member Knot also pushed back against springtime rate cuts and market pricing stating, “markets are getting ahead of themselves on cuts”.

Fed’s Waller commented that the Fed should not cut rates too fast, saying he and fellow central bankers should “take our time to make sure we do this right”.

In the UK inflation data for December surprised to the topside. Headline CPI stood at 4.0% y/y, above expectations and up from November’s 3.9% y/y. Core CPI was unchanged at 5.1% y/y, also above expectations.

In the US retail sales for December came out at 0.6% m/m up from 0.3% m/m in November. According to a Reuters poll analysts had expected 0.4% m/m. The ‘control group’ measure that strips out the most volatile parts also exceeded expectations coming in at 0.8% SA m/m, vs. 0.2% expected.

In the Red Sea the US military conducted yet another strike against Houthi missile capabilities. This came after another dry bulk carrier ship was attacked by the Houthis, just hours after the US had redesignated the Houthi movement an international terrorist organisation.

Equities: Global equities were lower yesterday as the central bank repricing continued, partly for the right reasons partly for the wrong reasons. The combination of both macro and inflation coming out on the high/strong side pushed yields higher and equities lower. Some of the late summer dynamics came back with utilities and REITs underperforming together on days when markets are lower and we not seeing a defensive rotation. Hence, this is not fuelling the recession risk but rather the higher-for-longer, which in our opinion is not so bad for equities looking 3-6 months down the road. In US yesterday Dow -0.3%, S&P 500 -0.6%, Nasdaq -0.6% and Russell 2000 -0.7%. Asian markets are a bit more positive today after the heavy sell-off yesterday. US and European futures are marginally lower.

FI: Yesterday, markets started on a weak footing from the front end, on the back of ECB’s Lagarde and Knot’s push-back on the rate expectations relative to markets. While Lagarde noted that a summer rate cut was likely, Knot said that the market pricing can be self-defeating and that he expects markets to correct to the ECB’s inflation outlook. Markets took 15bp out of the rate cut pricing for 2024, albeit with some volatility along the way, to now stand at 135bp priced for this year. The ECB governing council members have now entered the silent period. Later today, we also get the ECB minutes for the December meeting. Yesterday’s 13bn USD supply of 20y UST was well received, albeit with marginally lower bid-to-cover and no market reaction to the announcement.

FX: The USD continues to trade on a strong footing due to rising yields, spurring general risk-off sentiment in markets. However, since the EUR is also performing decently in the G10 space, EUR/USD remains just below 1.09. Besides the USD, the GBP also had a strong session on the back of the upward surprise in UK December CPI. On the other side of the spectrum, the Scandies and the JPY have been weak this week due to rising yields and risk-off sentiment. USD/JPY rose above the 148 mark, while both EUR/NOK and EUR/SEK drifted higher. Additionally, CHF proved to be one of yesterday’s biggest losers following remarks from SNB President Jordan.